BENEFITS WILL COME FROM THE ENERGY/CLIMATE BILL

The Other Side of the Coin: The Economic Benefits of Climate Legislation
J. Scott Holladay and Jason A. Schwartz, September 2009 (Institute for Policy Integrity/New York University School of Law)

SUMMARY
Several official studies have shown the costs to U.S. taxpayers and utility ratepayers of the energy and climate legislation now working its way through the Congress would be modest and certainly more affordable than the costs of the worst impacts of global climate change.

The Other Side of the Coin: The Economic Benefits of Climate Legislation, from the NYU law school’s Institute for Policy Integrity (IPI), is a study of the benefits that would accrue to taxpayers and ratepayers from the legislation.

The IPI’s conclusion, based on an estimate of the social cost of carbon (SCC), is that benefits outweigh costs under most “reasonable” assumptions. At any price over $9 per ton of greenhouse gas emissions (GhGs), which is likely to be a very low price in the coming carbon-constrained economy, the legislation would generate more benefits in the form of revenues and avoided losses than its costs. With a more conservative set of assumptions, the bill could generate 9 times more benefits than costs.

Studies by the EIA...(click to enlarge)
...and the CBO...(click to enlarge)
...and the EPA show the cost burden will be modest. (click to enlarge)

COMMENTARY
Businesspeople call it the price of doing business.

H.R. 2454, the American Clean Energy and Security Act of 2009 (ACES), written by Representative Henry Waxman (D-CA), Chair of the House Energy and Commerce Committee, and Representative Ed Markey (D-MA), Chair of the House Energy Subcommittee, is a massive piece of legislation with many strengths and weaknesses, a lot for everybody to like and a lot for everybody to dislike.

Senate energy and climate legislation is still being written. It is expected to be similar to H.R. 2454 in its major provisions.

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Nicknamed Waxman-Markey, the bill has 3 primary elements:
(1) It establishes the first-ever mandatory national Renewable Electricity Standard (RES), requiring regulated utilities to obtain 15% of their power from New Energy sources by 2020.
(2) It provides billions of dollars for unprecedented levels of federal subsidies for New Energy, Energy Efficiency, alternative vehicle and “clean” coal research, development and demonstration (RD&D).
(3) It establishes the first-ever mandatory national caps on greenhouse gas emissions (GhGs), targeted to cut U.S. spew 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050, and to facilitate achieving those cuts it establishes the first-ever mandatory national emissions commodities market for the exchange of emissions allowances.

It is going to cost the public something to make the transition to a New Energy economy and put a cap&trade system in place. That is the cost of doing business in a carbon-constrained world and it is much lower than the price of doing business in a melting world.

The point of the cap&trade system is to put a price on GhGs. The price will drive up the cost of energy but the bill provides a method of redistributing part of the revenues created from the auction of emissions allowances so as to minimize the burden of the rising energy costs to the public while increasing the cost-burden of spew on large-scale emitters such as power plants and heavy industry.

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In the early stages of the emissions-reducing plan, 85% of the emissions allowances will be given, rather than auctioned, to large-scale emitters. That will encourage the participation of the big emitters and ease them through the transition. Within 10 years, nearly the full 100% of the allowances will be auctioned, increasing enormously the revenues from cap&trade that can be applied to the building of New Energy and Energy Efficiency infrastructure.

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Studies by the Environmental Protection Agency (EPA), the Congressional Budget Office (CBO) and the Department of Energy’s Energy Information Administration (EIA) have all shown the cost of doing business over the first 10 years of the cap&trade system proposed in Waxman-Markey will be in the general region of 50 cents per day per household.

The IPI study is based on EPA data but the EPA’s estimate of economic impacts, like those of CBO and EIA, focus on costs and do not extensively assess the balance between costs and benefits.

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Direct benefits will come from cuts in GhGs (carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, perfluorocarbons, and hydrofluorocarbons). This will alter the course of global climate change and its impacts on the environment, the economy, public health, and national security.

This benefit can be estimated by multiplying the expected projected tons of avoided GhGs by the value of the harm from each ton. EPA has made such determinations.

There will also be indirect benefits from avoiding the social cost of carbon (SCC). Estimates of the indirect benefits have only been recently formulated.

The IPI study uses 2 comprehensive statistical models to arrive at a determination of Waxman-Markey benefits in the years 2012 through 2050:
(1)The Applied Dynamic Analysis of the Global Economy (ADAGE) model assesses only the U.S. economy but includes U.S. international trade.
(2) The Intertemporal General Equilibrium Model (IGEM) models only the U.S. economy but details energy and environmental issues. Because it does not deal with international emissions, it does not deal with emissions leakage, the economic losses from businesses moving to where there is no price on emissions.

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EPA data is available for IGEM year-by-year. EPA only has 5-year “snapshots” for ADAGE. This makes IGEM data more transparent. IPI found each model to have strengths and weaknesses. Its study presents calculations and conclusions for both.

The benefits of acting against climate change can be expected to increase over time. IPI estimates the costs will be greater to 2025 and the benefits will accrue more significantly after 2025.

Cost: The EPA estimated that Waxman-Markey will drive average annual household consumption down by $80-to-$111 per year. IPI estimates that, if anything, this cost assessment is an overestimate under either the IGEM or ADAGE model.

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Both models show well over 100,000 million metric tons of GhG-reductions through mid-century as the direct benefit of Waxman-Markey. Indirect benefits will come from 10 broad social costs of carbon (SCC) categories:
(1) Agriculture
(2) Bio-Ecosystems
(3) Energy
(4) Foreign Affairs
(5) Forest
(6) GDP and the Economy
(7) Health
(8) Snow packs/Glaciers
(9) Tourism
(10) Water

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Federal agencies have used a wide and undependable range of estimates for the SCC of a ton of GhGs making a precise quantification of the total benefit value of the bill’s provisions uncertain.

After a lengthy discussion demonstrating the many variables associated with the many benefits that come from Waxman-Markey, IPI suggests the estimated $660 billion cost can be weighed against SCC values from $5 per ton to $68 per ton. IPI estimates that the breakeven point is $7.70 per ton in the IGEM model and $8.97 per ton in the ADAGE model. In other words, it is very unlikely the cost of emissions Waxman-Markey will introduce will NOT produce benefits greater than the costs, and the benefits are likely to be GREATER than the costs, perhaps MANY TIME GREATER than the costs.

International mitigation will be as important as national action. The IPI study found that for every dollar of cost the U.S. incurs assisting in the mitigation of international GhGs, it will produce $2.29 in direct benefits (assuming a very likely $19 per ton SCC, similar to the general EU price).

The IPI study specifically noted EPA data lacking on 3 benefits of Waxman-Markey: (1) the reduction of GhG co-pollutants such as sulfur dioxide and nitrogen dioxide, (2) the prevention of species extinctions that would be otherwise caused by global climate change, and (3) the significantly reduced costs of maintaining a New Energy infrastructure instead of the present Old Energy system. IPI calls for EPA to do further cost-benefit analyses.

The public is going to pay to do business in a world that is changing more rapidly than even the 24-hour news cycle can accurately describe. The only choice remaining is between paying something to make an effective transition to a New Energy economy or paying a lot more to be dragged kicking and screaming through chaos.

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QUOTES
- From the EPA analysis of the economic impacts of Waxman-Markey: “…None of the models used in this analysis currently represent the benefits of [climate change] abatement.”
- From the EPA analysis of the economic impacts of Waxman-Markey: “Benefits from
Reduced Climate Change…Not Estimated.”
- From the IPI analysis: “A balanced and rigorous analysis of costs and benefits is an invaluable decisionmaking tool for legislators. In order to craft specific legislative language, to compare a bill with competing legislative alternatives, and ultimately to cast a rational and educated vote, legislators need to understand the full range of consequences—both positive and negative—that their decisions will have on the economy, the environment, and public health. But so far, in its study of climate change legislation, Congress has focused its information-gathering efforts much more on costs than benefits. Climate change is arguably one of the most complex issues to face Congress in recent memory, and yet Congress is essentially conducting its deliberations after having reviewed barely half the data.”
- From the IPI study: “…future emissions are expected to produce larger incremental damage as physical and economic systems become more stressed as the magnitude of
climate change increases.”
- From the conclusion to the IPI study: “Analysis supports the passage of climate change legislation as cost-benefit justified under most reasonable assumptions about the likely ‘social cost of carbon.’ Indeed, using conservative assumptions and excluding ancillary benefits, the benefits of H.R. 2454 could likely exceed the costs by as much as nine-to-one or more.”